It is simply untrue to assert that the funds managers of today face no risk. Yes, the money rolls in, and yes, the fees are raked out of our superannuation regardless of performance.
But funds managers do face risks that their teachers, nurses and other working folk clientele could only contemplate. For one, there is the haunting spectre of sustaining a stain on one’s shirtfront while fine dining at an upmarket CBD nosherie.
Whether the greatest risk is posed by a splotch of ragu or of salsa alla marinara, who knows? It may even be truffle oil, or spillage from an oaky Barossa shiraz.
Lunching misadventures aside however, the risks are low and the fees inordinately high for the nation’s investment institutions. Having recently highlighted the racket that is retail funds – the vertically integrated big bank wrap platforms that dominate the investment landscape and trot off with roughly 2 per cent of our super every year – it is time to look at the industry funds.
The fees are lower, therefore the returns higher. The latest figures from the Australian Prudential Regulation Authority (APRA) show industry funds performed about 30 per cent better than retail over 10 years. It’s not that they are superior money managers, they just charge lower fees.
But get this: industry funds place billions of dollars to invest with the retail funds anyway. Rather than just plonking this wholesale money in index or ”passive” funds, a lot of it is awarded to active managers.
The irony is the active managers don’t do any better than passive, they just charge more.
The other point is the operating expenses of the industry funds are on the rise.
The largest manager, Australian Super, has seen administration and operating expenses rise from $103 million in 2006 when it managed $28 billion and had 1.3 million members, to $214 million. (It now manages $65 billion and has 2 million members). That’s a jump from $79 per member to $107 per member.
This tends to make a mockery of the case the industry funds put for their deregulation, that it would bring economies of scale; that is, more money, lower costs.
Transparency is also inadequate. Amid the glossy pictures of smiley happy people in its annual review there was a tiny mention of a $214 million cost for IT matters.
Botched IT projects and a big advertising spend are probably the two main culprits for increasing costs at the industry funds.
Even though they are apparently not-for-profit, they spend members’ funds to advertise and thereby expand their pools of money. It is ironic that the more money under management, the harder it is to outperform the market.
So there is some unnecessary empire building going on.
Further to poorly disclosed IT cost blowouts, Superpartners – the joint venture between AustralianSuper, HOSTPLUS, HESTA, MTAA and Cbus – experienced a $130 million blowout and three-year delay last year, according to The Australian Financial Review. This year it was a $250 million blowout and four-year delay.
The retirement funds – AustralianSuper, HOSTPLUS, HESTA, MTAA and Cbus – recorded their investment in IT systems as an injection of equity capital in Superpartners, not as an expense.
As for transparency, there is no standard to which to adhere. Taking a look at the HESTA annual report for instance, it shows most of the money in Australian and international equities resides with active fund managers.
It doesn’t break out active versus passive but passive would have to be less than 25 per cent since the only two domestic managers with any passive allocation are BlackRock and Industry Funds Management (the industry funds’ fund manager).
The report doesn’t provide any colour on the performance of the individual investment managers. Some of this information is available on the managers’ websites (typically the ones who have done well). For other managers, it is difficult to find performance data anywhere.
It is a good thing fees charged by the industry funds are far lower than their retail counterparts. But they have their shockers, too.
The Orwellianly renamed Progress Super Fund (it used to be the Bookmakers Superannuation Fund) lost 8.7 per cent a year over the past five years versus the median fund return of 3.2 per cent.
It ought to take a good look at its investment management mandate (with a stockbroker in Melbourne). Excessive fees of 2.9 per cent a year were charged for its ”balanced” option.